Stablecoin Markets Interest Rate Parameter Updates

Temperature Check
1

Proposal Overview
This proposal seeks to implement 4 updates to all Liqwid stablecoin markets which currently all share equal interest rate parameters:

  1. Increase the kinkPoint from 65 to 90%.
  2. Increase the utilMultiplier from 4% to 33%.
  3. Increase the utilmultiplierJump from 775% to 100,000%
  4. Disable borrow caps on all stablecoin markets.

Markets Update Reasoning
Liqwid stablecoins are the most utilized markets in the protocol. Cardano DeFi market participants have expressed strong preference for USDC denominated debt as evidenced by Liqwid USDC market having the 6th highest yield for USDC-only liquidity pools across all lending protocols on every chain tracked by DeFillama: https://defillama.com/yields?token=USDC&category=Lending

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  1. Increasing the kinkPoint to 90% enables the maximum amount of stablecoins on Liqwid to be borrowed at the lowest possible interest rates. Optimizing for capital efficient borrowing allows the protocol to generate maximum revenue as more capital can be actively borrowed without a steep increase in interest rates that occurs in slope 2 post-kinkPoint.

  2. Increasing the utilMultiplier ensures Liqwid stablecoin suppliers continue earning the most competitive yield possible which the market has established as Liqwid’s organic stablecoin borrow rates due to sustained market utilizations in all stablecoin markets in the 60-70% range.

  3. Increasing the post kinkPoint slope’s steepness encourages borrowers to repay loans and for additional stablecoin liquidity to flow into these pools to earn maximum yield.

  4. Disabling the borrow caps will allow stablecoin markets to be fully utilized up to 100%. Suppliers who deposit in these markets will be compensated by an increase in the slope 2 steepness compared to current level and the highest yields possible (currently Supply APY at 100% utilization is 106.6% APY, new Supply APY at 100% utilization is 142.9% APY).

Current and newly proposed stablecoin interest rate models:

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Risk Considerations
A risk to consider with this update is liquidity risk to stablecoin lenders as utilization in these markets grows. The compensation for the liquidity risk stablecoin lenders face as utilization grows close to 100% is the increased yield from a steep interest rate hike that goes into effect at the kinkPoint.

Specifications
Liqwid Labs developers have completed the necessary testing and technical requirements needed to implement the proposed interest rate parameter updates to the stablecoin markets.

Conclusion
Liqwid Core Team supports these interest rate parameter updates to the stablecoin markets to maximize borrowing capacity and capital efficiency.

Do you support this proposal?

  • Yes, I support this proposal.
  • No, I do not support this proposal.
0 voters
2

Could we discuss how this improves on Liqwid App Proposal #43 and what we learned from that to get to this Temp Check?

2 Likes
3

Max APR should remain, otherwise the previous issues will return in extreme market conditions. It’s like we’ve forgotten why max APR was set high.

2 Likes
4

We have historically seen that borrowers typically don’t repay until their interest rate hits 40%+. Suppliers also don’t move in mass for new supply until 20%+ is achieved. If these trends are sustained with the latest rates, we will be around 92% Utilization. Higher rates after Kink point would be ideal.
This will open up another 10-15% on current stable coins or another $500k in liquidity that would be utilized quickly when compared against present-day rates.

Some market UTXO for the Stables: may need to be re-evaluated.

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1 Like
5

Agreed completely and this proposals updated utilMultiplier has been increased to reflect this reality, which has been observed in stablecoin markets for the past 12+ months. This proposal initially included 20% as the new utilMultiplier but is now proposing 33% with an increased utilmultiplierJump and also disabling the borrow cap.

With these latest updates the Borrow APR at 90% utilization would be 35.7%.

2 Likes
6

I’d be mindful of removing caps on iUSD given its price volatility… although an edge case someone with deep pockets can easily borrow a large enough amount, dump it on a DEX and do an oracle price attack…

7

Even in the case of an attack as you suggested, the following would happen:

  1. The attacker would mass dump iUSD on the DEX, causing the price on the DEX to crash.
  2. The iUSD oracle feed would reflect a much lower price (e.g., dropping from $0.86 to $0.40), but it would hit the cap and floor (currently at $0.67 - $1), which are hardcoded values. This mechanism would protect the protocol in such a scenario.
  3. Following the dump, arbitrageurs would likely buy iUSD on the DEX and redeem it on Indigo at $1, profiting from the difference between the DEX price and the $1 fixed redemption price on Indigo.

From what we have witnessed during the previous price crashes, the hardcodded values have protected the protocol during high volatility phase until the price is stabilizing. I think it would happen the same.